11 August 2015

SP 500 and NDX Futures Daily Charts - The Financialization Merry Go Round Is Winding Down

Stocks slumped today on the overnight news that China was devaluing their currency by almost 2 percent.

Countries devalue their currencies when their economy is weak, and they wish to hamper imports and stimulate exports.

Stock valuations in the US are fully priced in my opinion.

There was a story today about Viacom's stock buyback program.   The company took on debt in order to buy back stock, thereby improving the companies financial reports which are based on revenues and earnings divided by the total number of shares.

Rather than investing in improved products and services, the company invested heavily in buying its own stock to fatten the bonuses and salaries of executives.  This has cost the company billions and has left their balance sheet heavily indebted.

There is nothing wrong with choosing to finance your company using debt rather than new equity.  This is a classic finance problem.   And with debt yields (costs) at record lows, debt looks attractive.
But it is HOW the company chooses to invest this capital that makes all the difference.  And Viacom is apparently investing it in financialization of their quarterly results.  And that is a more general problem throughout the US economy.

Have a pleasant evening.